Get With The Plan: January 27, 2013

Greg, 60, and Verna, 53, want an expert opinion. They’d like to retire in five or six years, but they’re not confident enough to take the leap without some advice. Their goals are several.

“Restoring/rebuilding savings after four years of our child’s college, replacing both cars and doing major renovation/energy-efficiency projects on our 65-year-old house,” said Verna. “Length of retirement is of special note due to Greg’s family longevity history. His father is 94, his grandfather lived to 92 and even ancestors in the late 1700s lived well into their 80s.”

The couple, whose names have been changed, have saved $56,500 in 401(k) plans, $1.2 million in IRAs, $275,000 in a brokerage account, $15,300 in savings and $6,300 in checking. Greg also has a cash balance pension that will be worth a lump sum of $60,000 at retirement, or it could be turned into a $685 per month annuity.

The Star-Ledger asked Douglas Buchan, a certified financial planner with Main Street Financial Solutions in Pennington, to review the couple’s finances and help them refine their plan.

“Greg and Verna have done and are doing all of the right things to assure them of the retirement they envision,” Buchan says.

One of the biggest reasons is that they’ve secured long-term care insurance policies for both of them, and Buchan says the policies are “excellent.”

“Long-term care can wipe out a nest egg fairly quickly, sometimes leaving the surviving spouse with very little,” he says.

Buchan says the “mega wealthy” can afford to pay for care as they go, basically self-insuring. The less affluent often can’t afford a policy. Greg and Verna fit somewhere in the middle, so the choice to take out policies was a wise one for them to protect their assets should they ever need care.

Buchan took a look at their investments, and he says their asset allocation of roughly 60 percent stocks and 40 percent bonds is “very good.” He says it’s imperative to maintain an equity tilt to accomplish their goals for the long term.

Still, their asset mix needs some work.

“The make-up of their bonds is as it should be — short-term, high quality and diversified — although I would prefer to see more globally diversified corporate bonds versus Ginnie Maes,” he says. “Folks need to avoid the temptation of chasing yield by going further out on the yield curve and/or further down on the credit curve when it comes to bonds.”

Turning to their equity holdings, Buchan says about 20 percent of their assets are invested in just one stock.

“Holding one stock is gambling. Holding hundreds of stocks is investing,” he says. “Don’t gamble with your retirement.”

Ideally, Buchan says Greg and Verna should reallocate the funds in this one stock to be part of a diversified asset mix, or at the very least pare it down so it’s worth no more than 10 percent of their portfolio.

The couple should also increase their international holdings. Buchan says many investors mistakenly believe that international stocks are riskier, but research shows a different story. He says done correctly, a globally diversified portfolio will provide less risk than a U.S.-only portfolio.

“Long and short, if they are able to maintain a properly diversified portfolio, they will have no trouble living the retirement they envision,” he says. “Seems pretty simple and straightforward, right? Well, there is one elephant in the room that needs addressing.”

That elephant is investor behavior, Buchan says.

Conventional wisdom is that asset allocation is the most important determinant in investment performance — something he says is correct. But also key, he says, is not investment performance, but investor performance.

“It’s not what your funds do, it’s what you do,” he says. “And the propensity to sabotage one’s own investment plan grows significantly over time.”

Buchan says when you’re young and busy and working, it’s much easier to avoid getting caught up in the behavioral traps of investing. As investors approach or enter retirement, several dangerous things begin to happen from an investing standpoint, he says.

The first is free time, he says, and as the saying goes, idle hands are the devil’s workshop.

Second is the true realization that a portfolio needs to last the rest of the investor’s life, and that’s when bad things can start to happen.

“The volatility of the stock market appears more extreme than it used to. The talking heads spouting out doomsday scenarios seem to be everywhere,” he says. “And the belief that the temporary declines in their portfolio are actually a permanent apocalypse causes them to panic.”

Buchan says panic is the No. 1 killer of financial goals. He looks back to the recent market drops of November 2008 and March 2009, when he says thousands of retirees panicked out of a properly designed investing strategy.

“They either had bad advice or no advice back then and it destroyed their financial plan and retirement future,” he says. “Market declines happen — every year in fact. How you deal with them will determine whether you make it or not.”

Investors also need to watch for what Buchan calls “another biggie that we haven’t seen in a decade or so, but he’ll creep his ugly head again at the wrong time.”

“It’s that beautiful siren song of euphoria, which is the idea that your neighbor is shooting the lights out while your disciplined investment strategy is lagging,” he says.

He says investors also need to watch under-diversification, such as this couple’s large stake in one stock.

“I can’t tell you how many times I have seen executives at companies holding too much of their own company stock,” he says. “Under-diversification can make you rich, but it can also make your riches disappear. It’s a gamble, and there’s no reason to gamble.”

He says Greg and Verna have done all the things to this point that they should have done — with the exception of their asset mix — and they will be able to live out their retirement the way they envision.